What happens to my bonds if the company restructures?Medium

It depends entirely on where your claim sits in the queue — and whether enough of the value reaches your level to be worth arguing about.

2 min read · 430 words

A company cannot pay what it owes. What happens to a bond you hold depends on one thing above all others: where your claim ranks against every other claim.

The queue is the answer

Value is applied down a sequence — secured lenders first, then senior unsecured, then subordinated, then shareholders. Wherever the value runs out is called the fulcrum, and it decides everything.

• Above the fulcrum your claim is covered. You are likely to be repaid, and you have little reason to accept anything less.
• At the fulcrum your claim is partly covered — and you are the one who ends up owning the company, because that is where the equity gets handed over.
• Below it there is nothing for you on the arithmetic, and your position is a negotiating one rather than an economic one.

The calculator on the restructuring desk works out where the line falls for a given set of claims.

The three things that can be offered to you

• A distressed exchange. New bonds for old ones: less principal, or a later maturity, or both. It is voluntary in name, and the alternative is normally worse, which is what makes it work. Rating agencies treat it as a default however it is described.
• A debt-for-equity swap. Your bond becomes shares. You stop being a lender and become an owner, usually of most of the company, with the old shareholders diluted to very little.
• An amend and extend. The maturity moves, and you are paid a fee and a higher margin for waiting.

Can you refuse?

Sometimes, and it matters less than people expect.

Most bond documents require every holder to agree before payment terms change, so in an out-of-court exchange you can simply decline. But the company can then use a court process — a scheme or restructuring plan, or Chapter 11 — where statutory majorities plus a court can bind you anyway.

Holding out has worked, and the best-documented example took fifteen years and a great deal of litigation. It is not a strategy for most holders.

Two things worth checking before any of this

• Which law governs the bond. Domestic-law debt can be changed by domestic legislation; foreign-law debt cannot. This is the single most consequential line in the terms.
• Whether it has a collective action clause. If it does, a supermajority can bind you and the process will be quicker. If it does not, everybody's problem is bigger.

What you get if the company goes bust covers the liquidation case, which is a different question from a restructuring.